As pharmaceutical companies in the U.S. gear up for annual meetings, shareholders are calling for changes to the corporate structure to address drug pricing, board independence and lobbying.

These issues are proving to be defining environmental, social and governance issues for pharmaceutical companies. Shareholders have argued that now is the time to address concerns that could either threaten the credibility of the industry or serve to keep the status quo in place at a time when attention is drawn to historical misgivings such as high drug prices, stagnant corporate leadership and opaque political interference.

Shareholders will vote on the proposals at each company's annual meeting, many of which will occur in late April or early May. Boards of directors have said in their respective proxy statements whether they approve or disapprove of each of the proposals.

Drug pricing as credibility risk

The visibility of drug pricing in the pharmaceutical industry is a hurdle that companies have foreseen cutting into revenue and reputation through 2019 and beyond. Shareholders harbor the same concerns, proposing at several of the top companies that leadership is accountable for the prices it charges for products.

In the case of Johnson & Johnson, the world's largest healthcare company by market value, shareholder Oxfam America proposed that the company's Compensation and Benefits Committee "report annually to shareholders on the extent to which risks related to public concern over drug pricing strategies are integrated into JNJ's incentive compensation policies, plans and programs … for senior executives," according to the company's 2019 proxy statement. Oxfam America is a charity that focuses on ending global poverty.

"A key risk facing pharmaceutical companies is potential backlash against high drug prices," Oxfam wrote in its supporting statement for the proposal. "Public outrage over high prices and their impact on patient access may force price rollbacks and harm corporate reputation."

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Johnson & Johnson's board of directors recommended against the measure.

"The board believes the proposal would not provide meaningful information to shareholders, is not necessary and would not be in the best interests of the company or its shareholders," Johnson & Johnson said in its proxy statement.

Shareholders used the same language to propose annual drug pricing reports at Merck & Co. Inc.

"The board believes that its current annual disclosures are consistent with what the proposal seeks — an annual report on the extent to which risks associated with public concern over drug pricing strategies are integrated into the company's incentive compensation plans and programs," Merck said in its 2019 proxy statement.

The proxy advisory firm Institutional Shareholder Services recommended in its 2019 guidelines that investors "generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices."

As for the potential for reputational, market and regulatory risk, ISS suggested shareholders approach issues "case-by-case."

At Pfizer Inc., shareholders asked for the same annual report and included mention of a July 2018 tweet from President Donald Trump that said the company "should be ashamed that they have raised drug prices for no reason." Pfizer promised no price hikes that year but raised them again at the beginning of 2019.

Other companies receiving similar proposals were AbbVie Inc., Biogen Inc., Bristol-Myers Squibb Co., Celgene Corp., Eli Lilly and Co. and Vertex Pharmaceuticals Inc., according to the nonprofit organization Proxy Preview, which also said votes in 2018 in favor of the same proposals ranged from 18% to 28% of shareholders.

CEO, meet chairman

In Europe, the largest pharmaceutical companies have board chairmen who are independent of executive leadership. To stray from that path is considered highly abnormal.

Yet in the U.S., having a single person running executive operations and making board decisions is not only commonplace — it is almost ubiquitous at the largest companies. Nine out of the 10 largest companies in the U.S. by market cap operate this way.

Shareholders at Pfizer proposed in 2019's proxy round that the chair of the board of directors be an independent member during the next CEO transition. Current CEO Albert Bourla does not currently serve as chairman, however, former CEO Ian Read — who left the role on Jan. 1 — is the executive chairman and not considered independent because he still receives a company salary.

"There is a potential conflict of interest for a CEO to have an inside director act as chair," the shareholders said in support of the measure.

A similar proposal was brought to Johnson & Johnson, which, along with Pfizer, argued that making the shift to independent chairmen would destabilize the companies' trajectory.

"We believe that adoption of an independent chair policy is unnecessarily rigid and not in the best interests of the company and our shareholders," Pfizer said in opposition to the measure in its 2019 proxy statement.

Allergan has come under particular fire from activist investors to shake up its leadership structure. Brent Saunders holds the positions of both CEO and chairman of the board of directors.

In Allergan's proxy statement, the company agreed to phase in an independent chairman during the next CEO transition, but not immediately as shareholder Appaloosa Management LP proposed.

Lobbying under the microscope

At some of the largest companies, including Pfizer and Eli Lilly, the National Center for Public Policy Research proposed that the companies develop an annual report disclosing payments for lobbying and other organizations for that purpose.

"Rather than letting outside agitators set the message that these relationships are somehow nefarious, the company should explain the benefits of its involvement with groups that advocate for smaller government, lower taxes and free-market reforms," the research center wrote.

Both companies recommended shareholders vote against the proposal.

"As we do not control what portion of the organization's budget is spent on lobbying, it is the fact of company membership in and support for the trade association, and the trade association's total lobbying expenditure, that reveals the most about Lilly's political activities," Lilly wrote in opposition to the matter. "As a result, the board does not believe any value provided by the requested additional disclosures merits the resources required to produce such a report."